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What’s in store for China in 2012?

What’s in store for China in 2012?

Gordon Orr, in an article in the McKinsey Quarterly, “What’s in store for China in 2012?” makes ten predictions for China. Staying clear of political issues, he discusses main issues that will dominate markets. While China will continue to lead the world in growth statistics, there are a number of areas where it has large scope for improvement. Why does China suffer from accounting scandals and what can be done to improve its image abroad so that its acquisitions seem more like business deals rather than threats to locals?

While it is well known and accepted that China will be the primary growth engine for the world economy, it is not going to stay insulated from current events either. Gordon Orr, a Director in McKinsey’s Shanghai’s office has put together ten predictions for China. These are summarized below.

1. Consumption and investment will be spurred by Government policies – Policy makers will boost consumption by giving tax breaks and rebates and raising minimum wages. The government will also invest heavily in the manufacturing sector which will continue to push the economy forward riding on low wages and improving infrastructure.

2. Rural land ownership will see reform – Since land reform is essential to increasing agricultural output, China will try several different pilot projects in different parts of the country to see which one works. One such project running in Chengdu has already been able to give 90% of its rural resident’s medical insurance.

3. Real estate will languish since authorities will try to cool prices. Purchase and credit restrictions will be maintained. This has already made an impact and the numbers of sales have seen a sharp decline. Some restrictions may be eased to prevent local government default and a property rout. The government is also continuing its policy of affordable housing for the poor to cushion the construction sector.

4. Further inflation will occur in food prices. Increasing purchasing power and urbanization is changing eating patterns and more meat is being consumed. This in turn is diverting more food grain to livestock. Improvements in productivity will be slow and price volatility will stay high.

5. Investments in green technology will increase – China is already a leader in solar and wind energy products. In 2012, it will grow this industry further by marketing directly to end users worldwide. Mergers and acquisitions in the sector will help Chinese industry consolidate its position further. In 2011, out of a total of 51 IPOs for green tech firms, 28 were from China.

6. Accounting scandals will continue – China has a poor reputation in this field. In 2011, more firms were delisted from US exchanges than the money that could be raised in IPOs. There could be more such shocks for investors and one can expect greater caution to be exercised while investing in Chinese firms.

7. Private equity and venture capitalists may take a beating – many investors had bet aggressively on Chinese companies. Now with these firms facing large losses. Some fund managers may just choose to walk away.

8. Chinese acquisitions abroad will increase – As prices of assets drop, mainly in Europe, many acquisitions will be attempted. There will be resistance to this as well. In the US, acquisitions will be largely confined to property. The election year will prevent any businesses from being acquired.

9. The Automobile segment will witness slow growth – the market for small and budget cars will see rapid growth. Stagnant real estate will impact sales of luxury cars, and while the government will push electric battery cars, large scale commercialization will not be possible in 2012.

10. Hospital reforms will accelerate – this will be helped by clearer policies governing payment mechanisms and by the entry of overseas funds into the sector. Falling prices will also be seen in the pharmaceutical and medical device sector. While locals will gain, multinationals may just take a wait and watch approach.

Note: The preceding is a summary of an article found though our research, and is provided here with editorial comment for members only. Please see the full article at the following link for full original content.

http://www.mckinseyquarterly.com

The New Asia Innovation Team

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